Net-effective rents in NYC
A recessionary feature of life in NYC: landlords are not lowering their rents, but instead giving the first and last months free. So a crappy studio will still have a listed rental price of $1895; but with two months free, the net-effective rent is: $1 579.
Why not just charge $1579 for all 12 months? The following reasons come up:
- When it comes time to renew the lease, the landlord is going present the assumption that negotiations are starting from the listed rental price, $1895. But that makes for an effective rent increase of ~17%, even if the rent doesn’t go up past $1895. Most rent increases are of %5. If the economy doesn’t shoot back up in a year’s time for all boats, people are just gonna move again.
- Landlords are trying to preserve the appearance of higher rents on their rent rolls, which they have to present to banks in order to obtain or maintain financing. This is what a real estate broker told me. But when I pressed the broker about the charade that this is setting up, I didn’t get much of an answer.
Reason 2 is a charade. A loan officer worth his title is now going to look past the rent rolls, to the balance sheet for the period of the lease, and see that there are two big holes for the free months. This is going to make the loan officer hesitate, just as he would if he saw steady rents of $1579.
That is, assuming the loan officer isn’t in on the charade. Because maybe he is in on it. Maybe he is the one telling the landlord: ”Just keep the rent rolls steady.” The bank’s goal may be to repackage the loan into high quality bonds. And if that is the goal, then the loan officer will be happy to see rent rolls that say $1895, and ignore the two free months. The loan will be described as high quality to some derivatives packaging house, and we’re back to 2007, with junky real estate based bonds being sold off to unwitting investors as high quality paper. Because aren’t the two free months pretty much equivalent to two missed mortgage payments?
Somebody please explain this to me in a way that puts it in a more positive light.
